‘Till Debt Do Us Part’: Financial Implications of the Divorce of the Irish Free State from the UK, 1922-6. John Fitzgerald & Seán Kenny TEP Working Paper No. 2117 November 2017 Trinity Economics Papers Department of Economics Trinity College Dublin ‘Till Debt Do Us Part’: Financial Implications of the Divorce of the Irish Free State from the UK, 1922-6. John FitzGerald and Seán Kenny1 Abstract In this paper, we discuss the unresolved apportionment of national debt when Ireland exited the UK in 1922. Using archival sources and contemporary accounts, we estimate that the British claim on Ireland in 1925 amounted to between 80 and 100 per cent of GNP at a time when the political stability of Ireland was already fragile. We describe the process of how this contingent liability, arising from the Anglo-Irish Treaty of 1921, was ultimately waived in a Financial Agreement in 1925 at the expense of an unchanged border with Northern Ireland. The Irish government also sought, but failed, to secure protection against discrimination for Catholics in Northern Ireland as part of the agreement. While for the Irish Government, this settlement may have represented a political failure, the economic outcome of the agreement transformed the economic position of the new Irish State from one of potential insolvency into one of viability. JEL: E62, F50, H60, H77, N00. Keywords: Contingent liability, public debt, secession, independence, Ireland, United Kingdom, Financial Agreement, political economy, border. 1 John Fitzgerald is at Trinity College Dublin- email jofitzge@tcd,ie ; Seán Kenny is at Lund University, Sweden- email [email protected] 1 1. Introduction In the aftermath of the ‘Brexit’ referendum result, with the UK’s contingent monetary liabilities as a result of leaving the European Union (EU) to be resolved, the potential economic effects of Brexit on the island of Ireland and the political implications for the border between Northern Ireland and Ireland has formed a centrepiece of debate. There are parallels with Ireland’s exit from the then United Kingdom of Great Britain and Ireland, which took place in 1922. The Treaty that established the Irish Free State2, signed in 1921, addressed both issues: the border with Northern Ireland and the apportionment of the liabilities of the United Kingdom of Great Britain and Ireland between the smaller United Kingdom of Great Britain and Northern Ireland (UK) and Ireland. However, the Treaty left the details of the financial settlement and the final shape of the border to be finalised at a later date, casting uncertainty over the economic viability of the newly independent state. The status of the Irish border was a crucial issue for both parties to the settlement, and in 1925 it was the lever in arriving at a financial agreement that temporarily suited both the UK and Ireland. The largely unstudied aspects of how Irish exit from the UK were finalised in a new agreement in December 1925 form the centrepiece of this study.3 The post-World War I era saw many other such breakups resulting in a dramatic restructuring of the boundaries of the European continent. While some fragmentations occurred in an unstructured manner without any formal agreements between parties or adversaries, such as the Polish and Finnish exits from the Russian Empire, the Irish divorce, which we address, was formalised with an agreement signed by both parties on December 6th 1921. This type of more orderly breakup was mirrored in a number of later cases that include the Alma-Ata Protocol in 1991, which saw the dissolution of the Soviet Union, and the agreement reached in 1992 which lead to the breakup of Czechoslovakia in 1993. Such consensual divorces have, to a greater or lesser extent, also dealt with the economic consequences of the dissolution of states or unions by allocating assets and liabilities between the new political units. In the case of the Treaty establishing Ireland in December 1921, Article V provided for the final determination of Ireland’s share of UK Government Debt. The division of the debt would ultimately become linked with Article XII, which stipulated that a Boundary Commission would, based upon the “wishes of the inhabitants,” re-draw a border for ‘Northern Ireland,’ a political entity which had been established by the Government of Ireland Act of 1920. The lack of discussion on the financial liability amongst contemporaries reflected the fact that the decision by Ireland to seek independence from the UK was driven by political considerations. It also probably reflected a much more limited understanding among the key players of how modern economies worked and of the potential long- term importance of a high debt level. Through the use of a number of primary and contemporary sources, this paper documents the political economy of events which resulted in the final settlement and provides analysis of the potential debt burden of independent Ireland in the event of “no deal” for Ireland in 1925, in today’s parlance. The contingent liability was very large under Article V and would have placed doubt over the solvency of independent Ireland. However, the eventual settlement, which saw the vast bulk of this liability written down in December 1925, was unplanned by either side. It emerged as part of a broader agreement which settled the border of the new state by revoking Article XII. Section 2 of this paper looks at the broad context in which the final settlement of 1925 was reached. Crucial to the final outcome was the evolving story of the Boundary Commission. Section 3 describes the negotiations 2 Now called Ireland. 3 See Barry,’The First Irexit’ for a parallel with present. 2 between all three governments in November and December 1925, which resulted in a new agreement. Section 4 examines the economic significance of the deal on the national debt by reconstructing the counterfactual and comparing with the post Agreement outcome. With the benefit of hindsight, its impact on the economic prospects of the new Irish state was quite profound as Ireland may have ended 1925 with debt to GNP of 90 to 110 per cent instead of the ratio of 10 to 15 per cent which was the actual outcome. However, for the wider public and for the financial markets, it seems to have been treated as a more limited development. Conclusions are set out in Section 5. 2. Context The Anglo-Irish treaty was signed on the 6th of December, 1921 between representatives of the Irish Free State (henceforth ‘Ireland’) and the government of the United Kingdom.4 It is associated with the end of the Irish war of independence, the beginning of political independence of what were the southern 26 counties of the island and the ‘permanent’ partition of Northern Ireland, which remained a part of the United Kingdom. The terms of the Treaty were the immediate cause of the subsequent Irish civil war in 1922-3, which was primarily fought within Ireland between Irish government forces and anti-treaty rebels, who were opposed to the Irish parliamentary Oath of Allegiance to the British Crown (Article IV) and the partition of Ireland which was bound to result from its ratification (Articles XI, XII). While other research has addressed the later 1938 Financial Settlement in detail, little attention has been afforded to the contingent public debt which comprised part of the Treaty.5 These Articles “never sparked the same passions” as those dealing with sovereignty, but the potential consequences of the financial Articles were very significant.6 2.1 Unfinished Business of the Anglo-Irish Treaty 1921 The Treaty’s text contained a number of unresolved issues relating both to public finance and the boundary line which would divide Northern Ireland and Ireland. A contemporary, Lord Buckmaster, described it as “full of grave and dangerous ambiguity”7. Article V confirmed that Ireland would assume liability for the service of a share of the Public Debt of the United Kingdom and War Pension payments, as existing on 6th December, 1921. The liability was to be calculated at an unspecified future point in time and “in such proportion as may be fair and equitable. The second unresolved financial issue was that Ireland agreed to pay fair compensation to public officials who were directly affected by the new change of government such as judges and public servants (Article X). The issue of compensation was to be dealt with by the Compensation (Ireland) Commission, a body which would apportion liabilities between Great Britain and Ireland for damages, but was not mentioned in the Treaty.8 However, the most politically sensitive unresolved item was contained in Article XII, which allowed ‘Northern Ireland,’ originally created by the Government of Ireland Act of 1920, to exit the Irish Free 4 See Appendix 1b. 5 O’Rourke, ‘Burn Everything’; Ó Gráda, Ireland ,pp. 412-6 ; Fanning, Irish Department of Finance, c. 4. 6 Matthews, ‘Irish Boundary Crisis,’ p. 407. 7 Hansard, H.L. Deb 22 March 1922, vol. 49 cc. 709-829. 8 Compensation was dealt with by subsequent agreements which were superseded by the Financial Settlement, to which we restrict our focus. 3 State within one month. It did so on the 8th of December, 1922 petitioning “that the powers of the Parliament and Government of the Irish Free State shall no longer extend to Northern Ireland.”9 As a consequence of this predictable unionist rejection of an all-Ireland settlement, a Boundary Commission, consisting of three representatives appointed by the governments of Ireland, Northern Ireland and the UK, was to be established.10 Its Report, which the Commission was under statutory obligation to produce, was to determine the new boundary by considering “the wishes of the inhabitants, so far as may be compatible with economic and geographic conditions.”11 2.2 The Boundary Question 1920-2 The government of Northern Ireland, under the unionist leadership of Prime Minister James Craig, refused to appoint a Commissioner.